Press Release: IMF Executive Board Approves 12.3 Billion Euro Stand-By Arrangement for Hungary
IMF News, November 6, 2008
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- Published: November 6, 2008
Approval and Facility
- The Executive Board approved a 17-month SDR 10.5 billion (about €12.3 billion or US$15.7 billion) Stand-By Arrangement for Hungary.
- SDR 4.2 billion (about €4.9 billion or US$6.3 billion) is immediately available; the remainder will be available in five installments subject to quarterly reviews.
- The Stand-By Arrangement entails exceptional access to IMF resources, amounting to 1,015 percent of Hungary's quota, and was approved under the Fund's fast-track Emergency Financing Mechanism procedures.
Program Objectives and Design
- The arrangement is designed to:
- Facilitate the rapid reduction of financial market stress in Hungary.
- Support longer-run economic goals by creating conditions necessary to facilitate appropriate reforms in government finances and in the banking sector.
- Two key objectives:
- Implement a substantial fiscal adjustment to ensure that the government's debt-financing needs will decline.
- Maintain adequate liquidity and strong levels of capital in the banking system.
- Program elements highlighted:
- Accelerated path of fiscal adjustment and the introduction of a rules-based fiscal framework.
- Enhanced liquidity provision to financial markets.
- A system to ensure high levels of capital in the banking system.
- Strengthened financial sector surveillance.
External Financing and International Support
- IMF financial support combined with commitments by the European Union (€6.5 billion or about US$8.4 billion) and the World Bank (€1 billion or about US$1.3 billion) total €20 billion (about US$25.8 billion) in financial support.
- The joint financial assistance is intended to provide sufficient reserves to meet Hungary's external obligations even in extreme market circumstances.
Authorities' Challenges and Policy Rationale (Mr. John Lipsky remarks)
- Hungary experienced disruption from the global financial crisis despite prior successful macroeconomic adjustment.
- Specific market stresses observed:
- Failed government bond auctions.
- Drying liquidity in the secondary bond market and sharply rising bond yields.
- Stock market declines and currency depreciation.
- Restoration of investor confidence requires:
- High degree of policy discipline and large external financing.
- Consistent implementation of the program and international financial support.
Annex — Recent Economic Developments
- Hungary faced early and significant fallout from the global financial crisis due to:
- High external debt levels: 97 percent of GDP at end-2007.
- Significant balance sheet mismatches.
- Despite policy strengthening since 2006 (fiscal consolidation and tax administration improvements), Hungary was hit hard by global deleveraging and increased perceptions of counterparty risk.
Program Summary and Key Policy Measures
- Growth and inflation projections:
- Growth is expected to contract in 2009 to -1 percent from around 1¾ percent in 2008.
- Inflation, which peaked at 9 percent in early 2007, is projected to reach 4 percent at end-2009.
- Growth is not expected to reach estimated potential of 3 percent until after 2011.
- Main program priorities:
- Substantial fiscal adjustment: a large structural fiscal adjustment of 2½ percent of GDP with emphasis on expenditure measures; introduction of a rules-based fiscal framework.
- Social mitigation: low-income pensioners will be exempt from the elimination of pension bonuses.
- Upfront bank capital enhancement: provisions for added capital and resources to finance a guarantee fund for interbank lending.
- Large external financing assistance from IMF, EU, and World Bank to support return to normal international funding.
Hungary: Main Economic Indicators, 2005-09 (selected figures)
- Real GDP (change in percent): 2005: 4.1; 2006: 3.9; 2007: 1.1; 2008: 1.8; 2009 Proj.: -1.0
- CPI (end year): 2005: 3.3; 2006: 6.5; 2007: 7.4; 2008: 5.1; 2009 Proj.: 4.2
- CPI (average): 2005: 3.6; 2006: 7.9; 2007: 6.3; 2008: 4.5
- Unemployment rate (average, in percent): 2005: 7.2; 2006: 7.5; 2007: 7.8; 2008: 8.5
- Gross domestic investment (percent of GDP) 1/: 2005: 23.6; 2006: 23.1; 2007: 23.0; 2008: 22.8; 2009 Proj.: 20.0
- Gross national saving (percent of GDP, from BOP): 2005: 16.1; 2006: 15.6; 2007: 16.6; 2008: 16.5; 2009 Proj.: 18.0
- General government (percent of GDP), ESA-95 basis — Overall balance: 2005: -7.8; 2006: -9.3; 2007: -4.9; 2008: -3.4; 2009 Proj.: -2.5
- General government (percent of GDP), ESA-95 basis — Primary balance: 2005: -3.7; 2006: -5.4; 2007: -0.9; 2008: 0.6; 2009 Proj.: 1.9
- General government (percent of GDP), ESA-95 basis — Debt: 2005: 61.6; 2006: 65.5; 2007: 65.8; 2008: 67.4; 2009 Proj.: 70.1
- Money and credit (end-of-period, percent change) — M3: 2005: 14.6; 2006: 13.8; 2007: 11.0; 2008: 1.3
- Money and credit (end-of-period, percent change) — Credit to nongovernment: 2005: 18.9; 2006: 17.1; 2007: 17.3; 2008: -6.2
- Interest rates (percent) — T-bill (90-day, average): 2005: 6.8; 2006: 7.0; 2007: 7.6
- Balance of payments — Current account (percent of GDP): 2005: -7.5; 2006: -6.4; 2007: -2.0
- Reserves (in billions of euros): 2005: 15.7; 2006: 16.4; 2007: 19.5; 2008: 19.8
- Gross external debt (percent of GDP) 3/: 2005: 75.0; 2006: 90.4; 2007: 97.2; 2008: 106.4; 2009 Proj.: 115.8
- Exchange regime: Floating
- Present rate (November 6, 2008): Ft 202.3 = US$1; Ft. 261.4 = €1
- Nominal effective rate (2000=100): 2005: 111.6; 2006: 105.1; 2007: 111.8
- Real effective rate, CPI basis (2000=100): 2005: 132.6; 2006: 127.0; 2007: 142.5
- Quota at the Fund: SDR 1038.4 million
IMF Press Release No. 08/275 — November 6, 2008